Building My Dividend Porfolio
Karin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
This is part three of a ten-part series, which I will be publishing every week until the entire portfolio has been introduced. You can see Part One here, where I discussed my first addition, Abbott Laboratories; Part Two, where I discussed PartnerRe Limited; and Part Three, where I discussed Enterprise Products Partners.
I have been analyzing dividend companies for about six months. Now I am constructing a model portfolio of my own that I am presenting to the Motley Fool community, one company at a time. I am digging deeper into individual companies that are at the top of my list.
I review the company on seven different criteria: yield, number of years paying and raising dividends, 5-year Dividend Growth Rate (DGR), 5-year projected Earnings Growth Rate (EGR), total return for the past twelve months, PE and payout ratio. I constructed a rating system that awards points for each of the previous criteria. A “perfect” score would be 28 points, with 4 points awarded in all seven categories.
For a complete change of pace from what I have already chosen, and a possible surprise to many investors, the next company to make it into my portfolio is Cracker Barrel Old Country Store (NASDAQ: CBRL). Cracker Barrel has received the highest score of the companies I have examined so far, with a total of 20 points.
Cracker Barrel is a restaurant and retail company. It operates 620 stores in 42 states (I am sad to say that I have never eaten in one, although I am quite familiar with their cheese) and offers an entire line of food and decorative home products online, by mail order, and in its retail stores. The company was founded in 1969 and is based in Tennessee. The company is part of the Services sector and the Restaurant industry.
In terms of its potential as a dividend-generating stock, I looked at the current dividend metrics. Cracker Barrel’s yield is 3.1% and it has a 10-year history of consistently paying and raising dividends. The last raise in its dividend was Oct. 17, 2012, for an increase of 25%. The dividend was raised twice in 2012, for a total of 54% more paid out in 2012 than in 2011.
The company’s 5-year DGR is an incredible 18.4%, which far exceeds my threshold of 7.0%. The earnings growth rate as estimated by the 23 analysts who cover the company is 10.0%, as compared to the growth rate for the industry of 15.6% and for the sector of 14.2%. The S&P 500 5-year EGR is currently 8.7%.
CBRL’s earnings estimate for FY 2013 (ending July, 2013) is $4.66, compared to last year’s actual $4.61. The consensus estimate for FY 2014 is $5.35, an increase of 15%.
The company has a TTM PE of 14.7, based on today’s price of approximately $64. The average PE in the Services sector is 20.1, and in the Restaurants industry is 21.4.
Cracker Barrel is currently trading at about 8% less than its 52-week high of $69.30, reached in October, and up 28% from its low of a year ago. Its twelve month total return is 29.9%.
The Motley Fool community rates CBRL a four-star CAPS pick, with 125 Bulls and 27 Bears. The 10 professional analysts who cover the stock rank it a 2.6 (1.0 = Strong Buy, 5.0 = Sell) with 1 Strong Buy, 3 Buys, 5 Holds, and 1 Underperform. They have assigned a one-year average target price of $73, which is a potential gain of 19%.
I also looked at another dividend-payer in the restaurant industry, McDonald’s (NYSE: MCD). I know that MCD is an extremely popular stock for dividend portfolios, but here’s how it lines up according to my criteria: it yields 3.4%, and has been paying and raising dividends for 46 years. Its DGR is 15.5%, its EGR is 8.6%, and its twelve-month Total Return is a loss of 6.5%. In my scoring system, it scored a 16, which is not quite enough to get it into my portfolio.
McDonald’s is a stable and reliable company, and its dividend yield is attractive, but it does not have the recent growth that I like to see, which is what is keeping it off my list. Its other metrics look good, but there are other companies that do better for what I am seeking.
A direct competitor of Cracker Barrel, Darden Restaurants (NYSE: DRI), also offers a pretty terrific dividend. It is currently trading at $45 per share and yields 4.4%. I haven’t seen Darden on too many best-of lists, but it looks pretty good according to my criteria. The DGR is 25.9%, the EGR is 10.7%, the PE is 12.8 and the payout ratio is 51%. In fact, Darden scores a 16 on my system; its main flaw is that it has not been paying and raising dividends for 10 years, only 8. That, however, makes it a company that I will be keeping an eye on over the next two years. Once it hits the ten-year mark, if it can keep up its metrics, it may very well find a place in my portfolio.
I’ve created a chart to show how the 3 companies stack up in terms of their ratings.
Cracker Barrel Old Country Store has many strengths, including excellent historical dividend growth, an attractive yield, a reasonable PE, a low payout ratio (indicating the ability to continue paying the dividend even in the event of earnings reduction) and impressive growth over the past twelve months. It is now the fourth stock in my new dividend portfolio.
I will begin tracking it based on the closing price on the day that this article is syndicated.
khern0203 has no positions in the stocks mentioned above. The Motley Fool owns shares of Darden Restaurants and McDonald's. Motley Fool newsletter services recommend Cracker Barrel Old Country Store and McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!